Flattening the COVID-19 Curve in Developing Countries

The more contained you want the novel coronavirus to be, the more you will need to lock down your country – and the more fiscal space you will require to mitigate the deeper recession that will result. The problem for most of the Global South is that policymakers lack fiscal space even in the best of times.

LEE, MASSACHUSETTS – COVID-19 is ravaging advanced economies such as Italy, France, Spain, and the United States. Beyond the deaths and human suffering, markets are discounting a catastrophic recession accompanied by massive defaults, as expressed in the radical repricing of corporate credit risk by financial markets.

As horrific as this sounds, the situation in the advanced economies is likely to be much more benign than what developing countries are facing, not only in terms of the disease burden, but also in terms of the economic devastation they will face. And while two academic communities – public-health experts and macroeconomists – are starting to talk to each other, unfortunately the conversation has mostly involved only the advanced countries.

The public health community has made the differential equations that govern contagion almost mainstream. People now talk about the role of the R0 factor (the average number of new infections caused by each infected person) and about the need to flatten the contagion curve through social distancing and lockdowns.

Macroeconomists initially saw the pandemic as a negative demand shock that would need to be countered by expansionary fiscal and monetary policies to support aggregate spending. Soon enough, many of them realized that this shock is different. Unlike the 2008 global financial crisis, which led to a collapse in demand, the COVID-19 pandemic is first and foremost a supply shock. That changes everything.

If output is collapsing because people do not want to or cannot spend, adding spending power may help. But if Broadway theaters, universities, schools, sports arenas, hotels, and airlines are shut down to stop the spread of the virus, giving money to people will not reignite those industries: they are not lacking in demand. They are shut down as part of the public health policies implemented to flatten the curve. If firms are not producing because their workers are locked down, boosting demand will not magically make goods appear.

As a consequence, macroeconomists are now focusing on how to make social distancing and lockdowns tolerable and limit the damage that the supply shock will generate. In the US and the United Kingdom, governments are planning large fiscal packages to expand health-care provision, protect payrolls, provide additional unemployment insurance, delay tax payments, avert unnecessary bankruptcies, shore up the financial system, and help firms and households survive the storm.

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But one frequently unstated assumption of this approach is that governments will be able to mobilize the necessary resources, essentially by borrowing more, if needed, from their own central banks, as they implement quantitative easing (QE). Economists refer to governments’ ability to borrow as fiscal space. In short, the flatter you want the contagion curve to be, the more you will need to lock down your country – and the more fiscal space you will require to mitigate the deeper recession that will result.

That leaves developing countries in the lurch. Even in the best of times, many of them have precarious access to finance, and resort to the printing press leads to a run on the currency and an inflationary spike. And these are not the best of times.

Most developing countries rely for foreign income on a combination of commodity exports, tourism, and remittances: all are expected to collapse, leaving economies short of dollars and governments short of tax revenues. At the same time, access to international financial markets has been cut off as investors rush to the safety of US and other rich-country government-issued assets. In other words, just when developing countries need to manage the pandemic, most have seen their fiscal space evaporate and face large funding gaps.

The standard prescription for revenue collapses and external financing problems is a combination of austerity (to bring spending in line with income), devaluation (to make scarce foreign exchange dearer), and international financial assistance to smooth the adjustment. But this would leave countries with no resources to fight the virus and no means to protect the economy from the damaging effects of lockdown measures. Moreover, the standard prescription is more inefficient if all countries try it at once, owing to negative spillovers on their neighbors.

Under these conditions, even if developing countries want to flatten the curve, they will lack the capacity to do so. If people must choose between a 10% chance of dying if they go to work and assured starvation if they stay at home, they are bound to choose work.

To give countries the financial capacity to flatten the curve requires a level of financial support that will not be feasible with existing approaches and with international organizations’ current balance sheets. To help manage the pandemic in the Global South, therefore, it is critical to recirculate the money that is fleeing the developing countries back to them. To do that, the G7 and the G20 should consider several measures.

First, the US Federal Reserve has announced swap lines with the central banks of Australia, Brazil, Denmark, Korea, Mexico, Norway, New Zealand, Singapore, and Sweden. This mechanism should be extended to many more countries. If fear of default is an impediment, these funds could be intermediated by the International Monetary Fund, which should redesign its existing Rapid Financing Instrument to meet current needs.

Second, as central banks implement quantitative easing, they should purchase emerging-market bonds, especially the less risky ones, in order to free up more space for international financial institutions to focus on the more difficult cases.

Third, dollarized or euroized economies that do not have their own currency and hence a lender of last resort, such as Panama, El Salvador, and Ecuador, should be offered special financial facilities so that their central banks can backstop their banking systems.

Lastly, developed countries should not – as the European Union unfortunately has just done – impede or prohibit exports of tests, pharmaceuticals, and medical devices.

Flattening the COVID-19 curve will require concerted economic action at the international level, especially with respect to developing countries. Given the global nature of the problem, doing the right thing is the smartest thing to do.

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Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist at the Inter-American Development Bank, is a professor at Harvard's John F. Kennedy School of Government and Director of the Harvard Growth Lab.

To flatten the curve in poor countries you can't use disposable personal protection equipment (PPE) used in more developed countries.

Fortunately, this particular pandemic virus is easily inactivated with just temperatures above 60ºC for 30 minutes. Ovens, clothing dryers, food warmers, and saunas all can operate at these temperatures and times and that can be used to allow reuse of PPE and homemade PPE like the facemasks in the photo for this article.

The concept of using disposable equipment allows it to be utilized for all the different biological pathogens like Anthrax that can't be killed by a food warmer at 60ºC. Being a universal solution, bureaucratic rules have been created that demand disposable equipment. People can create their citizen's defenses against this virus as discussed in the following link to a pdf document we are following to protect ourselves.

Thanks so much for generously passing on your document Dallas. It is full of useful information and tips to help people survive this thing in an achievable way. I have circulated the PDF file widely here in Australia and I hope that it will help people. Once again, much obliged!

This analysis is pragmatic, professional and remarkable in its underlying suggestions that the current pandemic may not be effectively, timely or compassionately addressed unless the global community rises to a level of involvement and commitment that will empower existing or new world-wide institutions to effect credible intervention-in time.

The global community so far has been unable to address the slow, but accelerating impact of a changing climate system, in part, because the specific impacts and areas of most noticeable impact have been removed from high density urban areas. The pandemic, by contrast, is specifically targeting high-density urban areas with significant population interactions with all global areas via tourism and commerce. Perhaps, with a perfect storm, the global community may now be approaching the emotional capacity to reach a consensus that, indeed, we are in this together, and need an effective, compassionate and timely strategy to address both climate and pandemic issues.

Some areas of 'do-able' intervention that may be worthwhile considering might be:

1. Consider the scenario of having 100 million developing country individuals contribute $100 each year to help individuals in developing countries via micro-finance organization such as www.kiva.org. Donated funds enter a revolving loan status that can be re-loaned again and again; Kiva borrowers have a repayment rate of over 95%.

2. Consider empowering WHO with sufficient funds and staff to develop a long-term status enabling it to deliver trust-worthy and effective preventive solutions in collaboration with mega-donors like the Bill & Melinda Gates Foundation.

3. Consider a global, country-by-country, required 2-year public service duty for all individuals, with options for a variety of public health, community, development, climate and education, with public funding paying for these individuals to complete graduate and professional degrees in areas of demand globally, and a 2 year post-graduate service in an area of high need. It appears as suggested by many of our young people, and articulated passionately by a young female Swede, that we, globally, desperately need a true commitment of service to community and others.

Isn't that the response to the COVID-19 pandemic will advance/ expedite the already pending stimulus in many large economies? For both political and economic reasons USA, UK, and India were gearing up for fiscal stimulus to support the slowdown in the growth and boost/ strengthen the key sectors.Hopefully, countries had thought of the measures and made arrangements that may be infused into the economy very soon.

An alternative approach is to isolate and support those over eighty or with high blood pressure and diabetes - the rest wear masks, distance and have their temperature checked every day, a kind of lock-down where work continues for 90% of industry instead of for just 10%.

But perhaps we are wrong, perhaps the lock-down will work extremely well, stopping the virus in its tracks, and the debtors and creditors will be wise enough to bridge this time gap in a sensible manner. But from what I have seen so far, I remain a skeptic.

As someone who lives in Southern Hemisphere in a country with extremely limited fiscal space I have had over the last few days the distinct intuition that this lock-down will neither work (through lack of discipline, equipment) nor be affordable in the least. Yet, the main online newspaper ran a poll, and a paltry 3% of people agreed with me that a 21 day lock-down was a mistake.

The first issue one of the herd fallacy - people feel safe if they do what everyone else is doing, regardless of the logical consequences, and the rest of the World is locking down.

The second issue is one of a certainty fallacy - we know that if the virus spreads to everyone we will experience deaths of x. It can be calculated. The issue with the economic downturn is that we cannot estimate it, and further measure its long tail of ongoing effects - see the 'deaths from despair' in the US heartland. Most people will choose a guaranteed dollar over a 10% chance to win twenty dollars - humans are willing to pay a high price for certainty, sometimes too high.

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Mass protests over racial injustice, the COVID-19 pandemic, and a sharp economic downturn have plunged the United States into its deepest crisis in decades. Will the public embrace radical, systemic reforms, or will the specter of civil disorder provoke a conservative backlash?

For democratic countries like the United States, the COVID-19 crisis has opened up four possible political and socioeconomic trajectories. But only one path forward leads to a destination that most people would want to reach.

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